Theory of the second best

In welfare economics, the theory of the second best (also known as the general theory of second best or the second best theorem)^[1] concerns the situation when one or more optimality conditions cannot be satisfied. The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.^[2] Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing one or more additional market distortions in an interdependent market may partially counteract the first, and lead to a more efficient outcome.^[3]

^ Heath, Joseph (2009). Filthy lucre : economics for people who hate capitalism. Toronto: HarperCollins. ISBN 978-1-55468-769-5. OCLC 615371821.
^ Cite error: The named reference Lipsey was invoked but never defined (see the help page).
^ Krugman, Paul (June 22, 2014). "The Big Green Test - Conservatives and Climate Change". The New York Times. Retrieved 27 June 2014.

[1] Heath, Joseph (2009). Filthy lucre : economics for people who hate capitalism. Toronto: HarperCollins. ISBN 978-1-55468-769-5. OCLC 615371821.

[Lipsey-2] Cite error: The named reference Lipsey was invoked but never defined (see the help page).

[3] Krugman, Paul (June 22, 2014). "The Big Green Test - Conservatives and Climate Change". The New York Times. Retrieved 27 June 2014.

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